Tech Innovator in Japan Sets Its Sights on China

HIROKO TABUCHI

Monday

May 31, 2010 at 5:17 AM

Softbank’s most promising ventures are in China, where it has made a series of strategic investments in an array of prominent Net companies.

TOKYO — A Japanese technology giant little known outside Asia is racing to capture the booming Chinese Internet market. And in the process, it hopes to become a global player straddling what is fast becoming the world’s most wired region.

The company, Softbank, already trumps Google in Japan, where it has the country’s most popular search engine and e-commerce site. It also runs the fastest-growing mobile phone carrier in Japan and operates its largest broadband network. Softbank is also the sole Japanese carrier for the Apple iPhone; in addition it is the only company providing data service for the iPad, which went on sale Friday to much fanfare.

But Softbank’s most promising ventures are in China, where it has made a series of strategic investments in some of the country’s most prominent Internet companies.

It invested in the Chinese Web retailer Alibaba in 2000, pushing its founder, Jack Ma, to start Taobao, now the biggest e-commerce site in the country. Softbank remains one of Alibaba’s leading investors, with a 34 percent stake in the company.

This year, Softbank will introduce a service that connects Taobao to its Yahoo portal in Japan.

Softbank, based here in Tokyo, also has a 35 percent stake in Oak Pacific Interactive, which owns the hugely popular social networking and game-playing sites RenRen and Kaixin.com.

“We want to be No. 1 in Asia on the Internet,” Masayoshi Son, Softbank’s charismatic chief executive who founded the company in 1981, said in mid-May at an event where he unveiled new cellphones. “Before anyone knows it, Softbank will be a step ahead.”

At the same time, Softbank has established itself as a bridge between Silicon Valley innovations and the growing Asian market, investing in American start-ups in exchange for rights to bring their services to Asia.

In the year to March, Softbank more than doubled its net profit to 96.72 billion yen ($1.04 billion), driven by strong performance in its mobile business, while operating profit soared 20 percent to a record 465.9 billion yen. This year, Softbank forecasts operating profit of 500 billion yen, and plans to raise capital spending by 180 billion yen, to 400 billion yen.

China has been a notoriously difficult market to crack for overseas Web companies. Google, eBay and Yahoo, not to mention social networking sites like Facebook, MySpace and Twitter, have all struggled there, because of strong domestic competition as well as government blocking and censorship.

American companies also complain that the country is not a level playing field; foreign companies must operate through locally owned firms, creating a cumbersome ownership structure that limits their flexibility. And some critics say foreign companies have failed to grasp the needs of local Internet users.

But in its push into China, Softbank has avoided many of these headaches by focusing on e-commerce, local social networking sites and online games — sidestepping the difficulties of government censorship. For now, Softbank is betting that it will be commerce and entertainment, not the search for information, that drives Internet growth in China.

Softbank has also dodged, so far, the animosity that foreign businesses and, particularly, Japanese companies sometimes face in China, rooted in the troubled historical relationship between the two countries.

Mr. Son’s background — Japanese of Korean descent — gives him pan-Asian credentials. But more important, he is working with existing Chinese start-ups, forging strong capital partnerships but leaving local management in charge, winning him respect there. Mr. Ma of Alibaba sits on Softbank’s board, while Mr. Son is a director at Alibaba.

Softbank executives stress that success in Asia will hinge on mobile technology, because many users in the region are leapfrogging fixed-line Internet connections and using the Web from hand-held devices.

In its push into China, Softbank has exploited its diversity as both a full-fledged mobile carrier and an online business. China has been slow to adopt 3G networks, but users do not seem to mind. It is a huge market: Almost 800 million people already use cellphones in the country, while its population of Internet users is nearing 400 million, and those numbers are expected to grow.

“Being able to integrate our experience in running a mobile carrier, as well as our know-how in applications and handsets, is invaluable,” said Tetsuzo Matsumoto, a senior executive vice president at Softbank. “We no longer see ourselves as a Japanese company, or a cellphone carrier. Our aim is to become a global player on the Internet.”

Daisaku Masuno, who heads information technology and telecommunications research for Japan at Nomura Securities, described Softbank as a “trend-setting cellphone company,” which he characterized as “unheard of.”

“Not only do very few companies have such a huge presence online in both China and Japan, both crucial markets,” he said, but “anywhere else in the world, mobile carriers don’t understand the Internet and can’t keep up, and Internet companies don’t have the deep pockets or know-how to run cellphone networks.”

Mr. Masuno added, “Softbank is unique in that combination, and it’s starting to reap returns.”

Mr. Son is accustomed to handling the cultural crossover his company is undertaking. An early investor in Yahoo, Mr. Son transformed the Yahoo engine, making it Japan’s most recognized Web portal packed with music, games and other content that went beyond a simple search for information.

In 2006, Mr. Son borrowed heavily to buy the British network Vodafone’s troubled operations in Japan, turning around that business with marketing acumen and aggressive pricing.

Then Mr. Son brought together the many parts of his business; for example, handsets that run on Softbank’s cellphone network in Japan now come with a button that lets users jump directly to Yahoo Japan’s mobile site, bolstering the search engine’s visitor numbers.

Two years ago, Mr. Son brought the Apple iPhone to Japan, despite initial skepticism from critics who said the smartphone lacked many of the functions Japanese users were accustomed to — like a wallet phone function and mobile TV.

The iPhone has been successful in Japan; shipments more than doubled, to 1.69 million units, in the year ending March 31, giving Apple a 72 percent share of the country’s smartphone market, according to the MM Research Institute in Tokyo.

In Silicon Valley, some of Softbank’s recent investments include the live video-streaming site Ustream and RockYou, which develops applications for social networks. Softbank has said it intends to expand Asian operations for both companies.

Still, the company faces challenges. Though Softbank’s interests in China are promising, “revenue streams are mostly still in the future,” said Nathan Ramler, a technology analyst for Macquarie in Tokyo. Mr. Ramler said he was also interested in seeing how Mr. Son would make money from some of his latest ideas — like linking Softbank cellphones to Twitter.

Softbank’s cutting-edge businesses also make them inherently risky, Mr. Ramler said. “The rate of change and possibility that a new idea could come along and undercut existing business models is always going to be a risk,” he said.

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